Articles

The Wall Street Journal

By Katy Stech Ferek June 6, 2018

A new lawsuit against the former chief executive of ITT Educational Services Inc. accuses him of overlooking purchase offers in 2016 that could have saved the for-profit college’s network of 130 campuses across the country but would have jeopardized his multimillion-dollar severance package.

The bankruptcy trustee said former Chief Executive Officer Kevin Modany failed at his duty to protect the school’s operations by rejecting rescue offers and failing to develop a plan to make closure run smoothly for ITT Technical Institute’s more than 40,000 students. It calls for Mr. Modany and former board members to pay more than $250 million in damages and return compensation.

The lawsuit, filed in U.S. Bankruptcy Court in Indianapolis, came from lawyer Deborah Caruso [a partner with the law firm Rubin & Levin] who was appointed to wrap up its financial affairs and recover money to pay its final bills. It said that Mr. Modany “could not be trusted to place ITT’s interests above his own personal interests” as the school’s troubles intensified in spring 2016.The network of colleges shut down several months later amid scrutiny from the U.S. Department of Education and other regulators.

Before its collapse, the Indianapolis-based school, founded in 1946, grew to be one of the largest for-profit education companies in the country, with more than 8,000 employees. It offered degrees in electronics, drafting and design, criminal justice, business, information technology, health sciences and nursing.

Mr. Modany did not respond to a message sent Wednesday morning to his personal email account. A lawyer who represented Mr. Modany in November did not respond to a request for comment.

The lawsuit, filed Thursday, is critical of Mr. Modany’s response to signs in early 2016 that the school’s future was in jeopardy.

At the time, roughly 90% of the school’s revenue came from federal loans taken out by students, putting its operations under scrutiny from the U.S. Education Department. Federal law requires for-profit companies that own schools to submit annual auditing reports to the department and meet requirements from an accrediting agency.

In April 2016, the Accrediting Council for Independent Colleges and Schools threatened to end ITT Tech’s accreditation, citing the quality of instructional materials and other concerns. School officials also had signals that the Education Department was preparing to scrutinize its performance and ask the operator to set more money aside in case of emergencies.

Mr. Modany’s resignation would have helped the school retain its accreditation, the lawsuit said. Several actions from the Consumer Financial Protection Bureau and state attorneys general also pressed for Mr. Modany to leave, saying he was responsible for a culture that encouraged misconduct, it added.

Instead, Mr. Modany, who would have lost his severance package by stepping down, downplayed the risk to board members of losing accreditation.

“[He was] concerned with the damage to his reputation and future employment prospects if he admitted to fraud or was forced to resign,” the lawsuit said.

The lawsuit also named eight people who served on the school’s former board of directors for “chronically failing to exercise reasonable oversight over Modany.” The board members failed to investigate the school’s finances and ignored evidence of trouble, the lawsuit said.

“The resulting tragedy could have been avoided or, at a minimum, the damages could have been significantly reduced if [Modany and the board members] had fulfilled their fiduciary duties,” the lawsuit said.

ITT Educational Services, the parent company of ITT Technical Institutes, filed for chapter 7 bankruptcy in September 2016, leading to Ms. Caruso’s appointment as trustee. Since then, she has overseen a team of financial professionals who have found other occupants for its campuses, which were located in 38 states.

No money is expected to flow to compensate shareholders in the company, which began trading publicly in 1994.

Shortly after the filing, Mr. Modany requested more than $5 million in bonuses, salary and deferred compensation, saying he was terminated without cause. Other compensation came in the form of a company car, a financial planning allowance and tickets to sporting, theater and other events, according to the lawsuit, which also asked a bankruptcy judge to throw out that request.